Richard Bistrong FCPA Blog

Richard Bistrong FCPA Blog

A Real World Compliance Blog based on the actual experiences and perspective of Richard T. Bistrong, a former international sales executive. A venue dedicated to the open and professional exchange of real-world FCPA compliance issues and challenges. Now at www.richardbistrong.com

Monday, August 11, 2014

I have moved to www.richardbistrong.com!



I just wanted to thank everyone for their readership and support since my first post in February. To make for a more relevant and efficient reader experience, I have moved the blog to my website at www.richardbistrong.com and to go directly to the blog click here. For those who follow the blog via RSS, there is a new feed to which you can subscribe by the link here.

Thank you again, and I naturally welcome comments, suggestions, etc on the new site!

Monday, August 4, 2014

Corruption & Procurement: Bribery "Thrives in the Dark."


In the July 31, 2014 edition of the Jakarta Post there was a featured article “Smith & Wesson bribery scandal involves National 
Police officers,” which reported that  “the Indonesian Corruption Watch (ICW) has called for an investigation into an alleged attempt by US gun-maker Smith & Wesson to bribe officials at the National Police.” Such civil group investigations into the “demand” side of bribery is very relevant to a recent paper by
 Transparency International (TI) called  “Curbing Corruption in Public Procurement, A Practical Guide.” The TI paper, as stated in the on-line brief, “provides government officials, businesses and civil society with a practical introduction to the risks of corruption in public procurement.”

In addition, the report “outlines key principles and minimum standards which, when respected, can protect public contracting from corruption.” In my experience and opinion, the Guide goes well beyond that scope, and is an incredibly reflective representation of corruption risks that are prevalent in international public procurement. Thus, I hope that my comments, where I reflect on my encounters with such corruption, might lend additional value to this already compelling work through the elevation of real world examples and perspectives.

As the report states in the introduction “few government activities create greater temptations or offer more opportunities for corruption than public sector corruption,” and the OECD estimates that “corruption amounts to between 20 per cent and 25 percent of the procurement budget.” Thus, procurement corruption is a problem and dynamic that exists both on paper and in reality, and as the OECD points out, on a massive scale.  While the TI paper does an excellent job of breaking down public procurement into four chronological stages, what I found resonating was the description of how there is a continuum of corruption in terms of level and scale. The report speaks of corruption by “low and mid-level public officials” (see prior post on TI paper “Countering Small Bribes”) and “corrupt acts committed at a high level of government.” 

The guide also calls attention to subtle forms of corruption that are used to “manipulate budget allocations and project selection, even before the contracting process begins.” Indeed, as the report calls out, such activities occur “through the manipulation of eligibility criteria in the tender documents, or having technical specifications that are biased and without merit.” That description reminded me of a tender in the Middle East whereby the delivery period as stated in the specification was prohibitively short, as getting the necessary regulatory licenses after award would actually burn through through the entire delivery period.  It was a requirement to which adherence would be impossible, or so I thought.

Hello I must be going

I travelled to the Middle East to meet with the procurement chief (this was a substantial tender) and to see if this requirement could be changed as to allow for a reasonable delivery period “after regulatory licenses” were secured. In non-procurement speak, I was asking for a delivery period that would be fair to all bidders, as no vendor could control how long it would take to get a license.  Well, as I sat there professing the need for a modification, I noticed that on the chief’s desk was the approved and signed license for the competitor, who was also the incumbent supplier. To get that license, the competitor needed the end-user signature (being the person to whom I was speaking), and that would have occurred three to four month prior. Thus, needing no translator, and understanding what I was facing, I finished my coffee, thanked the procurement official for his time, and departed.

That is but one example of a public tender where one entity knew via corruption that it was going to receive an award, and the procurement authority used a restrictive delivery period as called forth in the tender document, to guarantee the result. It takes two to corrupt, and I hope this example demonstrates how both the supply and demand side work together to get a desired outcome, as the Guide states “even before the contracting process begins.” While I don’t know if a bribe was paid in my Middle East example, does it really matter, as the process itself was corrupted?

 Small Island, big purchase

The report talks of the “Financial Impact” of corruption, as “burdening a government with financial obligations for purchases or investments that are oversized, not needed or not economically justified.”  This is a very real and serious issue, and I have seen numerous examples of needless and wasteful purchases, some of which were designed to facilitate corrupt transactions (sometimes it was just disorganization and the output of inefficient procurement processes and personnel).  Either way, such procurements do not facilitate the public good through the acquisition of products and services that are needed by governments and hence, serve the well being of the citizenry.  I recall one story of a small island nation with an outgoing leader who started a buying binge prior to his departure from office. During that time period, there was a large procurement of  defense product, far beyond what the tiny island could have needed for domestic security, and I remember asking the sales manager, "what are they going to do with all that stuff?"

I didn’t really need an answer, I knew this was wrong,  and my question was rhetorical as part of my own rationalization process.  It was certainly clear to me that the purpose of that procurement had nothing to do with domestic security and it was nothing but an unnecessary purchase with corrupt intent under the “umbrella” of public safety.  A very telling example, and as the report states, these are funds that “could be used to provide or improve essential amenities and services” as opposed to facilitating corruption for personal financial benefit.

Principles                                                                                                               

The paper sets out a number of principles that “minimize corruption risk” in the procurement process, and a number of them resonated with me in the context of my own experience but the one that caught my attention was professionalism.  As the report states, “where procurement officials are poorly paid, badly trained or lacking a viable career path the risk of corruption increases.” Here we have a dangerous dynamic from the perspective of trying to change corrupt procurement environments. As Mr. Matteson Ellis states “when low-level government officials are not paid enough, they sometimes rationalize seeking rent by other means.”*

Making their Pension

Where you add regime change, which brings in a new group of procurement officials, it is a recipe for procurement corruption on a number of levels. After these new procurement officials get seated, they may aggressively seek bribes knowing their employment might be of limited term due to the next changeover (as with their predecessors).  I remember one such instance, post regime change, where an intermediary shared how there was going to be a series of procurements, as new officials knew that they only had a few years “to make their pension.” Accordingly, in such regions where you have low paid officials, high turnover due to regime change, and a lack of training, I see few solutions to this corruption spiral.  As described by Mr. Ellis, in such regions with weak state institutions,  “bribe requests might be baked into the economic order.”

Like the sales person on the front line of international business who may be looking at a pay check that speaks to “win above all else,” for the procurement official who sees nothing but opportunity to supplement what might be a meager state pay-check, both sides now look at corruption as win-win.  Small bribe or big bribe, this is a dangerous dance for all involved.

Corruption in the Dark

As the report states, “corruption thrives in the dark,” and “lack of information on governmental activity and decision making can easily hide corrupt manipulation of decisions in a procurement process.” So what can be done? Well, until governments seek to address the issues of training, compensation and turnover with respect to procurement organizations and personnel, perhaps the part of the TI Paper called “Checklist for Government Officials,”  (page 21, 3.2.) should be reviewed. This is a critical section which was designed to highlight red-flags “about the integrity of the process,” and which might also be a suitable guide for multinationals. In other words, where those inherent procurement red-flags exist within a region, country, or ministry, perhaps the corporation is well advised to “stay-away” until those built-in institutional perils are addressed and changed.

Accordingly, we are left with organizations such as Transparency International and those like the Indonesian Corruption Watch, who are not going to let the issue of bribery remain solely with the regulators at the individual and corporate level. In my experience, corruption risk needs to be addressed through a continued focus on international public procurements, as this is where the “demand” side of corruption exists. My complements to TI for publishing the Guide on Procurement; I found it surprisingly reflective of the realities “on the ground” of international business.  

* in How to Pay a Bribe  “Regional Flavor: Crosscutting Corruption Issues in Latin America,” which makes a very relevant companion guide to the TI piece.

Monday, July 28, 2014

Benchmarking Bribery and Corruption: "Vet it and forget it."



On my own "must read" stack has been sitting the "2014 Anti-Bribery and Corruption Benchmarking Report, Untangling the Web of Risk and Compliance," ("ABC Report") by Kroll and Compliance Week.  While I have read a multitude of bribery and corruption enforcement summaries, mostly published by law and audit firms, this was my first read of a compliance benchmarking report. Interestingly enough, upon completion, I thought about whether sharing my own experience and perspective with respect to the findings could actually add any value or relevancy to what is already an impressive and extensive report. 

Accordingly, a disclaimer: When I think about the experience and expertise of Kroll and Compliance Week, along with the resources deployed to publish this report, I call attention to my own viewpoint as intersecting but a small part of the overall scope of their collaborative effort. Hence, when I reflect on the report’s findings, it is solely in the context of my own experience with third party intermediaries, as a subset of third party vendors, and anti-bribery compliance as a subset of corporate compliance. In other words, my personal familiarity only overlaps some of the many issues covered in the Benchmarking Report.

As the ABC Report states in the introduction "we hope you find the information here useful and that it can serve as a guidepost for your efforts to understand how corporate compliance works best in your company," Thus, I hope that by sharing my own limited perspective, that I might also add some value to that same understanding. Ok, as this is a post about compliance not caveats, lets review:

The report sets out to:

       To provide compliance officers a "comprehensive view of the ABC  risks they have.”

       To identify “the resources they have to fight them.”

       And to demonstrate "how those resources are implemented into compliance programs.”

Two findings (among others) which were mentioned in the executive summary and which I will also focus upon are:

       The challenge that  "third parties continue to vex compliance officers."

       The dynamic that  "monitoring anti-corruption efforts on a continuing basis is weak."

"Taming Third Parties" as "the bane of anti-corruption programs." 

As the report states "taming third-party risks continues to be a major weakness for anti-corruption programs, and the problem may well be getting worse." Furthermore, there are a number of foundational hazards in third party assessments and on-boarding procedures that may amplify those difficulties.  A few of those challenges which I see as prevalent both before and during  the on-boarding process are:
  • "It's not my law" syndrome. There is an attitude among some third parties whereby they do not consider themselves as signatories or responsible to anti-bribery laws and acts. Thus, such intermediaries will have an attitude of "the law does not apply to me," or worse, "it is legal here." Where that corrupt approach exists before a relationship is even formalized, there is great peril for all involved.  Those third parties which look at the vetting process with “corrupt intent” and which do not seriously undertake the legal obligations as put forth in investigatory and vetting processes, will simply do and say "whatever it takes" to get representation and corporate agreement finalized.   
In addition, where local data and in-country vetting resources which are in place may also be corrupt, surfacing the ill will of such third parties who talk a good game of “compliance” might be difficult, even with the best intentioned assessment protocols.  As Mr. Matteson Ellis states, in such areas, corruption “might be baked into the economic order.” *
  • Collusion with an internal sponsor.  When an internal business sponsor, e.g. country manager, sales manager, etc., recommends an intermediary for onboarding, be additionally mindful of incentives, and the relationship between the sponsor and the intermediary. As Scott Killingsworth explains  “it is not just difficult, but impossible, to be truly objective about a decision when we have a significant interest in the outcome.”** In my experience, where companies do not look into the motives behind such internal endorsements, companies would be well advised to listen to Mel Glapion, Managing Director, Kroll,  and think about “sharpening the saw, and improving the processes and measuring that information that’s coming back to you.” 
Indeed, when you have an internal sponsor who recommends a third party for on boarding, and who has a personal financial incentive for "short term success," the risk of collusion between the sponsor and the intermediary during the vetting process dramatically increases. When that occurs, detection of corruption is severely hampered. In some cases, the company sponsor might actually "coach" the third party through the assessment process in order to insure the successful vetting of the intermediary. Such coaching might include the sponsor assisting in the completion of third party self-assessment paperwork and exams,  sharing confidential information about investigatory protocols, and overall interference in the onboarding process.

Due diligence and the life of a relationship

While the report points to a positive trend in terms of companies that are conducting due diligence on third parties, the contributors focus on an element of caution in that "compliance officers were more confident in their ability to vet third parties at the start of a relationship, and less confident in monitoring third parties once that on boarding examination had passed." In fact, the report shows the troubling statistic that "the numbers marched downward for monitoring compliance after a relationship starts (43.3 percent), auditing compliance of third parties (33.2 percent) and training third parties on anti-bribery and corruption procedures (30 percent). “ That is a trend fraught with great liability. Why?
  • Impact of regime change.  As Mr. Glapion, states, "people give good, very positive political statements about what they're doing, but if you scratch a little bit harder, what you see is that the follow-through doesn't support it." Or, as stated in the title "vet it and forget it." While Mr. Glapion recommends a four-year review and audit cycle, I would add that in regions with low integrity reputations, and where there is a regime change, such an event should trigger an automatic re-vetting protocol.  
Governmental turnover in politically unstable countries can often result in a change in the relationship between third party representatives and government officials. As newly appointed public officials take their place in the Ministries and bureaucracies, prior corrupt relationships between intermediaries and their new “friends in power” now come to resurface. Such a change in regime can dramatically  increase  corruption risk, with the potential consequence that today's "clean" intermediary could become tomorrow's "corrupt" one, as this  renewed relationship now comes into play with respect to future business and transactions.

Mr. Ellis refers to the hazards of such  "touch points" with government officials and state-owned employees as where “the incentives to manipulate the process can be great.” Thus, bribery risk is not necessarily a constant in the life of a relationship with an intermediary.  In low integrity regions with “weak government institutions” (see Ellis), risk can change abruptly, with a well-vetted legitimate business relationship in the past turning into to corrupt one without warning, and worse, the corporation is left unaware of this newfound exposure.

For an entity which "vets and forgets" this is a dynamic which can occur when the assessment process is not repeated after regime change or at least on a regular interval, as the ABC Report recommends.  In my experience, the higher the risk, as measured by the regional or country corruption index, as well as the market  (in terms of exposure to public officials), the greater the need for repeat due-diligence reviews through either event triggers or articulated time intervals. Fact patterns are often not enough to serve as future indicators, as changes of regime or ruling party can have a significant impact on corruption risk.

As Mr. Glapion recommends, corporations would be well advised to incorporate a process which commands, lets "go and audit some of the companies that either we reviewed three years ago or have been third parties of ours for a long period of time." It is like those commercial disclaimers on well performing mutual funds as "past performance is not indicative of future trends." In addition, as the report indicates, there is no symmetry between bribe and consequence, and investment in compliance over the long term "pales in comparison to regulatory fines that can hit hundreds of millions should a bribery offense go undiscovered."

In conclusion, as the ABC Report states, “without that fundamental effort to figure out what risks a company faces, building an effective compliance program to address those risks becomes more difficult.” Hopefully, I added some value to that effort by focusing on the reality that some intermediaries don’t take anti-bribery and corruption laws seriously, that they might collude with internal sponsors to circumvent  vetting processes, and that regime change can have a significant impact upon where an intermediary might “sit” on the continuum of corruption. How to deal with these potential gaps I leave to the experts, and would naturally welcome  and invite comment.

* “Regional Flavor: Crosscutting Corruption Issues in Latin America” chapter eight: How to Pay A Bribe 2014 (Wrage, Alexandra Addison). Mr. Ellis is Special Counsel, Miller & Chevalier.

** Killingsworth’s complete paper, ‘C’ Is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance, is available as a free download at http://ssrn.com/abstract=2271840.  Scott Killingsworth is a Partner, Bryan Cave.

Friday, July 25, 2014

Excellence in Anti-Corruption Compliance Day



On June 23rd, 2014, I had an opportunity to participate in "Excellence in Anti-Corruption Compliance Day" as hosted by Ethic Intelligence. While my participation was via video-feed, where I  lead a presentation and follow up Q and A session on "Rationalizing bribery: Confronting corruption in the front line of sales,"  I have recently read a number of articles pertaining to the remainder of the day,  and which I found quite relevant. 

The one day session which coincided with the start of the C5 Anti-Corrpution Symposium in London, was designed to facilitate an "exchange on various compliance issues, including experience in overcoming difficulties, latest trends, future best practices, and evolutions in legislation and enforcement." My own participation was geared towards, in the words of Philippe Montigny (Founder and President of Ethic Intelligence) helping to assist attendees in understanding "new compliance challenges that arise from operations in the field." 

In addition, as shared by Mr. Montigny in a recent newsletter, my presentation addressed how "it is also important to work with sales teams on the ground to find solutions that can be implemented at a strategic level," and how  "developing a longer term marketing strategy, etc. in a high-risk market can provide sales teams with the added value necessary to win bids and business over the long-term without resorting to bribery.”  

A summary of "Key Takeaways and Best Practices Sharing" is available via link.  I personally found the section on "Reinforcing the role of human resources in preventing corruption" as extremely relevant.  My thanks to Alexandra Almy, Certification Manager, Ethic Intelligence, for  all the hard work in publishing the summary,  and to Dorothy Gaulin, Ethic Intelligence, for making it digitally available. 

Clearly, bringing together so many professionals with different compliance perspectives into such a "working group" session was of considerable value.  So many of  the  anti-corruption "best practices"  that were shared by attendees can now be discussed across organizations. Indeed, as stated by Marjoleine Demmers, Director Corporate Responsibility and Group Compliance Officer, Royal HaskoningDHV in a recent post on Experts Corner, Ethic Intelligence, where she referenced the merit provided by the session in "how do others deal with similar issues? What can I learn, and what might be helpful to others?" I find it really refreshing and engaging to find someone with such background and expertise who is still is willing to look to others and ask "what can I learn..."

Thank you again to Ethic Intelligence for asking me to participate in their "Excellence in Anti-Corruption Compliance Day," and I look forward to continuing our exchange of perspectives and experiences.


Tuesday, July 22, 2014

The C-Suite Crucible and International Business: “Motivated Blindness"

COPYRIGHT FOR ILLUSTRATION BELONGS TO RICHARD T. BISTRONG. 

In the June 2013 issue of Business Compliance (Baltzer Science Publisher, Anthony Smith-Meyer, Editor), Scott Killingsworth (Partner, Bryan Cave LLP) writes about “Ethics in the Executive Suite: The Best, The Brightest and a Wicked Problem.”* The work is the first part of a two part series, and my focus is on part one “The C-Suite Crucible and Behavioral Ethics.”  In sum, the “wicked problems” of behavioral ethics that this article focuses upon in the C-Suite, in my experience, are also uniquely present in the thinking and behaviors of international business executives who confront corruption on the front lines of international business.

My goal today is to call upon Mr. Killingsworth’s behavioral and organizational paradigm to demonstrate how most of the dynamics that the article describes as existing in the “environment of the C-Suite” are also prevalent with respect to international business executives. I will use Mr. Killingsworth’s piece as an intellectual companion guide to my own perspective of international business misconduct, especially in the context of international bribery.  Finally, before setting out on this journey, when I speak of “international business executives,” I am referring to (from an organizational chart perspective) those at the front line of international business who also have group responsibility; thus, I refer to those who have supervisory authority and direct reports along with associated P and L responsibility.

Mr. Killingsworth isolates a number of elements as testing “the integrity of executives,” and my focus is on those which I have seen elevated in the thinking (including my own) of international business personnel. No single issue  dominants, for as Mr. Killingsworth well states, when it comes to misbehavior “it seldom happens in a single step.” Thus, I share my reflections on this work to expand upon our understanding of how misconduct can so easily be rationalized, whether in the C-Suite or in an overseas office of an intermediary.  So, lets take a look under the hood of an international business team, and see where the dynamics of misconduct might exist.
  • “The lure of large performance-based incentives” which can translate into “outsized temptations to do what it takes to obtain the desired results.”
As I shared at the Dow Jones Global Compliance Symposium, where international business executives have incentive compensation indexed to personal performance in high-risk (corrupt) areas “compliance becomes bonus prevention.” As Mr. Killingsworth states “here the notion of failing to “hit the numbers” or of “losing” a bonus one has come to expect, or failing to close a sale that one has considered likely, has obvious relevance: risk-taking increases and ethical standards may sag.” In a public-company environment, that pressure gets dramatically magnified at every quarter, as those pressures re-set from start. Nonetheless, regardless of company size or public listing, the entire issue of large incentive based compensation can create an inherent conflict of interest when it comes to decision-making, for as Mr. Killingsworth affirms “it is not just difficult, but impossible, to be truly objective about a decision when we have a significant interest in the outcome.”

As to the external setting, international procurements are often far and few between, marked with unstable state institutions (see work by Matteson Ellis), creating a “win big or lose big,” environment, with the obvious consequences upon forecast and bonus.  Where that bonus is tied to personal performance, as Mr. Killingsworth states “escalating commitment” may follow, where one takes greater risk to avoid loss (personal and professional), and that is a process “that seldom ends well.” It is like covering a bad bet with more money and a recipe forever increasing “small bribes” to insure success.
  •  “The ability to operate with great freedom and little supervision.”
In many organizations, supervision of international business leaders can often be “out of sight, out of mind,” where such personnel have more discretionary authority and operational freedom than their domestic counterparts. Having spent the early part of my career in US domestic sales, I can state with great certainty that as a domestic sales Vice President, I was subject to dramatically more oversight and audit in my work, comparative to my subsequent international responsibilities. I don’t think that was a unique experience, especially when a company considers the domestic or home market as the “primary market.”

I have seen many organizations treat international sales as a “secondary-sector” with the resultant impact upon supervision and discretionary authority for international executives. Where managers retain such power, as Mr. Killingsworth describes, it can be “difficult for subordinates or auditors to see the entire process that adds up to a violation.”
  • The impact upon thinking "by early success in high-risk initiatives."
From a personal perspective, this is a significant contributing element to risk taking; thus, it is worthy of great consideration for those who have compliance responsibility. Given the opportunity to get away with “small bribery,” (see post on “Countering Small Bribes”) especially given that when the talk turns to corruption on the front lines of overseas business there are often no witnesses, that dynamic can have an enormous and calamitous impact upon future thinking.  How?  As Mr. Killingsworth states, by “unwittingly increasing risk appetite over time” and creating a “vicious cycle” of overconfidence.

In other words, getting away with prior bad behavior leads to great distortion when thinking about the consequences of future corrupt transactions, as incremental risk “may lead to more serious violations.”  As Mr. Killingsworth describes “where misconduct is justified by rationalization and reinforced by success, small incremental steps can take us a long way.”  In other words, once front line international business personnel “dip their toe in the water” of corruption without getting caught, and with financial success, a rationalization sets into the thought process which starts to build momentum, and which then gets mixed into the normal course of business thinking. It then often results in making “compliance decisions on likelihood of detection.”

That thinking reflects what Mr. Killingsworth describes as the dynamics of “if nothing bad has happened, this is evidence nothing bad will happen.” Furthermore, this can “distort judgments of whether an activity is in fact illegal and, more cynically, judgments of the likelihood that anyone will notice the violation, or the severity of the consequences.” It is not my perfect storm of rationalization, it is intellectual Armageddon.
  • The thinking that a small infraction "does no one harm" and a belief that "the general rule does not apply." 
In prior posts, I speak of the illusion that bribery has no victims.  Most front line business personnel do not consider the impact of bribery upon local governance, standards of living, etc. They might even think that they are helping those local public officials who are very poorly paid by supplementing them with “small bribes,” and that the end user still gets the best product and level of service. Sometimes bribery results in the end user paying a lower price of goods and services, which further distorts the illusion a “win-win.” When you add in the thinking that “this is how it is done here” or “it is not even illegal here,” that makes for a volatile mix of rationalization.

As Mr. Killingsworth states “a suitable rationalization protects our positive self-esteem and denies the reality that we have selfishly violated a rule.” Indeed, when the thinking is that no one gets hurt by bribery,  and that it is part of local norms, that rationalization can easily win out over a more reasonable calculus to stay away from a potentially corrupt and liberty threatening decisions.
  • My own journey through self-deception 
As Mr. Killingsworth states, the sum of these factors, (along with others which are in the article), are “like the weight of water against a dike,” and that these variables “exert constant pressure on ethical decision-making at the top of an organization.” Agreed. However, having never made it to the C-Suite, but having described my own “perfect storm of rationalization,” this is a model that has significant relevance to those who supervise and work with international business executives. As Mr. Killingsworth’s describes, “where high stakes combine with temptation, power, pressure, urgency and ambitious people under few external restraints, a high-impact risk exists and must be addressed.”

As for my personal reflection, well, as Mr. Killingsworth states “when we start down the path of misconduct, the first person we deceive is usually ourselves” and the attraction to “money, power, autonomy, recognition, attention and status…may be strong enough to overpower allegiance to ethical or legal rules.”  Well said,  and a difficult chapter in my own life which I now can share with others.

Killingsworth’s complete paper, ‘C’ Is for Crucible: Behavioral Ethics, Culture, and the Board’s Role in C-Suite Compliance, is available as a free download at http://ssrn.com/abstract=2271840.  The abridged version published in Business Compliance as Ethics in the Executive Suite may be requested by contacting info@baltzersciencepublishers.com Subject: C-Suite ethics - Scott Killingsworth


Tuesday, July 15, 2014

How To Pay A Bribe: Solutions that Explode



Over the past few weeks I have had a chance to read How To Pay A Bribe, Thinking Like a Criminal to Thwart Bribery Schemes (2014, edited by Alexandra Wrage, Seven Wirz), and while I have enjoyed a number of the chapters, including those by Andrew Feintsein and Matteson Ellis (which is the subject for this post), I did find the book’s title to be somewhat confusing.  I think there is a difference between serious academic and practical treatment of bribery issues, which this book clearly represents, versus a subtitle of “thinking like a criminal” to thwart future schemes.  In any case, I have a great deal of respect for Ms. Wrage’s organization, as having had the recent pleasure of being a co-panelist with Eileen Radford (Director, Advisory Services, Trace International) at the C5 Anti-Corruption Forum in London; thus, I draw this distinction not in a negative context but just to call attention to my own observations.

As Mr. Severin Wirz states in the preface, “given that so few foreign bribery cases actually make it to trial, where the facts might come to light, how are we to lay bare the ways in which corruption actually functions in the real world?” While Mr. Wirz speaks of bringing in the voices of “authors, researchers and investigative journalists,” as well as “practicing lawyers and former prosecutors” here is my own attempt to “breathe life into the corruption literature,” by commenting on Mr. Ellis’ chapter “Regional Flavor: Crosscutting Corruption Issues In Latin America.”

Mr. Ellis isolates five variables as pertaining to bribery and corruption in Latin America, but as he states in his first sentence “bribery in Latin America looks like bribery anywhere else.” Thus, in total agreement, I will expand upon one of the five components that resonated most with my own experience, and which continues to confront personnel on the front lines of international business. Accordingly, while I am focusing on one of the five challenges, that does not in anyway dilute the impact or presence of the other four. The five elements that Mr. Ellis describes as having an impact on bribery in Latin America are:
  •        Boom and bust economic cycles
  •        The prevalence of state-owned companies
  •        Weak government institutions
  •        Concentrations of wealth and power in a small elite
  •        Family ownership of companies
As Mr. Ellis states “whether you are in the concrete jungles of Mexico City or the Amazonian jungles of northwestern Brazil, these characteristics, and the types of corrupt behavior they encourage, seem to exist.” Furthermore, as Mr. Ellis adds, and to my complete agreement, “understanding them is key to identifying and avoiding corruption risks in the region.” Accordingly, my primary concern pertains to these five matters as being so prevalent in other regions, from Asia to the Middle East, that the question of how to avoid them where they exist is extremely problematic given their proliferation.

The one issue which I will focus  upon is “weak government institutions,” as that dynamic not only lends itself to indigenous corruption, including “small bribes” as discussed in a prior post here, but also creates significant opportunities for corrupt third parties.  Where government structures are frail, the existence of “fixers” and “intermediaries” who then intertwine legitimate and corrupt services as to “help” a company sort out the confusion and uncertainty created by that frailty, creates a multitude of poor options for front line business personnel and compliance officials.  As Mr. Ellis confirms “complex regulatory regimes also mean that companies must often rely on despachantes (middlemen), gestores (facilitators), or other third party agents to get things done.”

At the front line of business, this is a very dangerous situation, and I would add that it creates opportunities for corruption before, during and after a business or sales cycle. How? By giving intermediaries an amplified opening to leverage uncertainty due to weak public institutions and to use that dynamic to their own advantage throughout the entire “lifespan” of a project. As Mr. Ellis states “complex regulations demand capable institutions. In their absence, opportunities grow for public officials to demand bribes,” and as he adds “ambiguity creates opportunities to manipulate rules for corrupt purposes.” In my experience, this is a significant problem with a real-world peril for those in the field and I will attempt to chronologically describe that experience.

Before: Engaging a Third Party

In areas where institutions are weak, I have seen how third parties explain the procurement process to front line business personnel in ways which are deliberately murky, complicated and confusing, with the goal of showing that the only way to possibly engage in that country is with a third party, who can “smooth out,” or “pay tolls” in order to maximize the chances for success. For someone in the field, the choice is now zero-sum, as they scratch their heads about “how to play,” and the thinking becomes “either I withdraw from this market altogether, as it is way too clouded to go it alone,” or “engage with this fixer who will do what he does best and at least allow us to compete here.”

The problem is that in such cases the third party mixes lawful with corrupt activities in a way that promotes a rationalization process whereby the front line manager may think, “well, he is also legitimately helping us, so why not engage with him?” It is an all too common recipe for corruption, and instead of the business manager controlling the process, the third party, through exploiting the weak public institutions and confusing local regulations, now controls both the information and the course of action.

During:  Access to information

Once the third party is engaged, and the sales or project cycle launches, the third party controls much of the access to state personnel (public officials) and documentation. As is often the case with weak institutions, there are few independent protocols by which a company can authenticate information that is being fed via the third party.  In addition, where institutions are weak, local data is often also corrupt; thus, even with the best-intentioned assessment or due diligence process, a monitoring effort might be doomed from the start.

I have also experienced third party explanations of how procurements are subject to sudden starts and stops, often due to personnel  turnover at the various ministries and regime change (see my post on procurement instability). Here is where we might experience third party explanations of “don’t worry,” as long as you “stay with me,” everything will be ok. Again, having already made a commitment to the third party, having no independent means of verification, a businessperson remains at the total mercy of the intermediary for information. At this stage, the talk turns often to corruption as third parties explain the necessity of “paying tolls” to new government officials who are now in power, as to insure that the “inside” on the procurement or project is maintained.

The aftermath: A dangerous intersection with “small bribes”

As I have shared in my posts about “procurement instability,” some of the greatest examples I have seen relating to the impact of weak government institutions have occurred after a procurement or tender has been awarded. These are examples of weak institutions at their worst. In sum, here is where there are often endemic delays, postponements, and renegotiations of contracts already awarded. Also, in many cases front line international business personnel have already reported back to his or her manager that an award has been made, so that sale is now included in production, and sales forecasts.  Some might consider a demand for bribes at this late stage as all “part of the process,” others might more crudely (and perhaps accurately) call it a “stick-up.”

Now come the never-ending questions to front line business personnel from management as to “what is the status of that sale?” As my supervisor once said to me “it is better for you when I don’t know about a sale, as once you tell me you won it, I am going to keep asking you about its status until we get the order and get paid.” Where that sale gets caught in that “quick sand” of corruption, so late in the process, it creates tremendous pressure on front-line personnel to get it “unstuck” by whatever means.

As stated, where weak government institutions exist, the post-procurement process is fraught with corruption peril, much of it pertaining to “small bribes” and the confrontation with corruption due to:

1. Getting what are often a multitude of signatures on an order in order to secure the “final” purchase order and how an agent needs to “take care” of people in order to get the order ultimately confirmed, including all associated paperwork, e.g. letters of credit, completed.

2. The common need for regulatory and import licenses, for example on Defense goods, and end user paperwork needs which might need to get signed. Again, more opportunities for third parties to leverage legitimate and corrupt services by the claim of “toll paying” to get the signatories “on-board” to perform what are normal governmental functions.

3. Inspections and/or acceptance protocols at the destination point which are needed to clear the goods for end user receipt or release of funds. As I once shared with a colleague, these are often procedures designed to benefit a multitude of parties all who can demand small bribes lest your product “rot in a warehouse.” I have seen these events degenerate into demands for bribes in the context of getting product cleared from customs, as well as bogus inspections designed to fail product in order to secure small bribes for “re-inspection.” This type of behavior is not possible where protocols and the institutions from which they are issued are strong and stable. 

4. Paperwork that needs to be secured for final remittance. Here, front line personnel, who often have incentive compensation indexed to that final payment, now often encounter third party claims of how “tolls” must be paid in order to get the paperwork finalized so that everyone can get paid. Here is where I also have seen third parties renegotiating their own commissions, as they explain how they need to make more money for corrupt disbursements. To a front line businessperson, this is all mind numbing, as there is no independent information, the finance department is exerting pressure to get paid, and everyone starts looking at “you.” At such a point the thinking can evolve into“ what do I need to do get this all over with.”

In sum, I will return to Mr. Ellis for his summary of “corruption is a crime of opportunity. People pay bribes by exploiting weaknesses.”  In my experience, it is the existence of weak government institutions that provide those greatest opportunities, and where a front line businessperson can easily become confused, and hence, leveraged, by corrupt third parties who show themselves as the only possible solution to separate the “forest from the trees.”

Solutions that explode

Maybe the solution lies in a scenario that I once experienced in the Middle East. The end user was lodging a complaint that grenades which were sold to the agency were not loud enough, and that he was going to fail the inspection report. Of course, with this complaint was the agent hinting to me that there was a “way out of the problem,” which of course he would facilitate. However, instead of surrendering to what I knew was a bogus complaint, at a meeting face to face with the customer, I stated that I was willing to sit in room with him, just the two of us, and to detonate a grenade. If it was not loud enough, I explained, I would take them all back.  I think the wire transfer happened the same day. For those of you who don’t sell things that explode, maybe Mr. Ellis has some other suggestions and I invite his comment. 

Monday, July 7, 2014

Deterrence: You had me at "being caught."

COPYRIGHT FOR ILLUSTRATION BELONGS TO RICHARD T. BISTRONG. 

At my sentencing hearing, Judge Richard Leon stated that he had no doubt that I had been ultimately deterred, and added "Have you made a turn in the road for the better? There is no question about that either. But I have to be concerned about others, others out there right now who are aware of this case, who are aware of other cases in this arena and who may think they can pull conduct of a similar nature or maybe even more egregious than that you engaged in, they need to understand, they need to be concerned that if they are caught, and even if they cooperate, they are going to do jail time because in this arena, that is the ultimate deterrence.” 

-Judge Richard Leon, US District Court, Washington DC, at the Sentencing Hearing of Richard Bistrong, July 31, 2012.

Deterrence.

Like bribery, there is no shortage of writing on the subject of deterrence, but what I fail to see is any perspective from those, like myself, who have ultimately been deterred by incarceration. So instead of waiting, I will share my own views on this subject. But first, in the context of the FCPA, what is the goal of deterrence? I will share Professor Andy Spalding’s view in the FCPA Blog as, “we want to deter the defendant from repeated bribes (specific deterrence), and put other companies on notice so that they will bribe less (general deterrence).” So, from the viewpoint of an individual who was sentenced and incarcerated, does it work?

I think there are a number of components to that question as I share my own experience. First, could I have been deterred during the time of my illegal conduct: no. Second, does my own experience as representing the personal consequences of crime help to deter others: not sure.

Back to Professor Spalding, who in Part Two of his series on deterrence defines the decision making process and theory as:

“based on utility calculations. A would-be bribe payor weighs the utility of paying a bribe against the disutility of punishment.  And how does he assess that disutility? As the theory goes, he considers three variables: the likelihood of being caught, the severity of the punishment, and its swiftness.  He weighs those three factors against all he stands to gain from the bribe and makes a rational decision. “

You had me at the “likelihood of being caught.”

Using Professor Spalding’s guide, I never got past the first variable in my own conduct. As I described in my recent posts on “rationalizing bribery,” and as I have shared via my participation in a number of anti- corruption symposiums, I knew what I was doing at the time was ethically wrong and illegal, and there is no justifying that conduct; however, more importantly for this discussion, at that time I did not think I was going to get caught.  No matter how many FCPA affidavits I may have signed, it made no impact, as I did not think I was going to face any consequences for my conduct.

As to the why, well, perhaps my own rationalizing variable of “no witnesses to corrupt transactions,” had the greatest impact on my thinking.  As Peter Henning recently shared in a NYT DealBook article, “unanswered is the question of whether the United States government can successfully pursue individuals for misconduct in a large organization based outside the country.” In many ways, his question very much pertained to my own thinking as to why I could engage in overseas corruption without any consequences. From the perspective of an individual, dealing with corruption far from the C-Suite, consideration of US law enforcement in a remote location with no witnesses is not exactly an active concern. An illusion, but one  which was easy to rationalize.

What About Others?

During the years of my own bribery conduct (2001-2006) there was not the level and publicity around FCPA enforcement actions as we have seen in the last five years (2009-2014). Thus, I think it is safe to say that awareness with respect to anti-bribery enforcement, especially among front line international business personnel is certainly a great deal higher in present times. But does that lead to greater deterrence? I think that is still a difficult question to answer, as while enforcement is certainly higher, there are also forces out there which support continued corruption. I think those factors include my own “perfect storm” of incentive compensation, procurement instability, no witnesses,  and the illusion of no victims. I think there is also a strong element of “that is just the way things are done in my territory,” and “it is not even illegal in my territory,” which also supports a continuation of corruption over deterrence.

I look at the unrelenting wave of FCPA enforcement cases, and putting aside the debate on personal versus corporate enforcement, it is clear that bribery is continuing on the front line of international business, especially in regions with reputations for corruption. So, given the continued rise in cases and the continued publicity around enforcement, is deterrence taking hold? I guess that remains a rhetorical question, but is there anything that can be done to magnify the consequences of corruption in order to increase the value of deterrence to those on the front line of international business?

You have to start somewhere.

For corporations, maybe the integration of the following elements into the training process might be warranted, as to focus on deterrence.

·       Let your teams know that you understand the “this is how it is done in my territory,” and “it is not even illegal in my territory” dynamic and get it out in the open. However, share the corporate philosophy of  this  is “not how we do it,” and “it is illegal,” along with engaging your teams on the prospects of long term value for both the company and the customer through a business strategy that is in no way “bribe dependent.” Show them the path to success where business development and compliance are partners.

·       Go through the process of “rationalizing bribery.” Use my model or your own, but neutralize each element including procurement instability (if I lose I will never see this sale again), incentive compensation (compliance as bonus prevention), no witnesses (I will never get caught) and the illusion of no-victims (bribery as win-win).  Show your teams first, that you understand how easy it can be to rationalize corruption and then dissect each element to pull back the distortions and show the realities.

·      Talk about enforcement actions to your international business teams. Use corporate and personal indictments as case studies to reinforce to your personnel that you would not tolerate such behavior, and that there are real consequences to engaging in overseas bribery.  When someone gets sentenced, again, use it as a teachable moment by keeping the consequences of corruption on the “front burner” to your teams. Remind them that this is a real world law with real world incarceration.  Talk about international law enforcement cooperation and that the days of creating an oasis of bribery by staging conversations far from the C-suite where no one gets caught are over.

·       Take training to a narrative. When you train your personnel, don’t just stop at “read this” or “watch this,” and now “sign this.” Ask your front line teams if they really understand the law.  Go beyond the anti-bribery provisions, explain the conspiracy elements, books and records, facilitation payments, etc and help them to understand the lines in the sand. Show them that you understand the pressures they face in the field, and that they are likely to confront risk and corruption in high-risk regions. Let them know that you are their partner, so help them to take the time to become familiar with the rules and regulations that now govern their behavior. Talk about enforcement actions and people who were incarcerated. Let them know that you will spare no resource in making sure they are properly trained but will also spare no resource if they are caught breaking the law.

Is that enough?

I view most parts of the populous as represented by bell curves, almost irrespective of issue. I learned about this in poly-sci 101, by S. Peter Regenstreif, one of the masters in this field.  In the case of would be FCPA violators, the same. Thus, using this theory of distribution, I would think that 10-20% of those on the front line of international business would never violate the law, with their 10-20% brethren on other side of the curve as going to violate no matter what training they receive or newspaper reports they read. Myself, I once occupied the latter and now happily reside in the former. Thus, there are 60-80% of those in the field who are susceptible to training, messaging, carrots and sticks, and thus, can be successfully deterred. Accordingly, let deterrence fall on those ears who can digest the consequences of incarceration, and who will look to peers and supervisors to understand what tools they need to deploy in order to undertake ethical, lawful behavior.

But, just in case.

For those who might be reading my post, and who are confronting their own personal storm of rationalization, inasmuch as my own personal experience might bring some value, let me share with you my perspective. The loss of liberty, even for my own fourteen and a half-months, is an awful experience, and no amount of personal financial or corporate upside is worth that price.  While my time at the Federal Camp at Lewisburg passed without incident, and I used my time to help others with their educational challenges as a GED and English as a Second Language instructor, the time away from family and friends can never be replaced. I missed events in the life of my family from which there are no “re-enactments.”

The impact of saying good bye to a wife and children knowing that your only remaining contact will be in a visiting room for an extended period of time is nothing but traumatic. Trying to “coach” my children through their college and grad-school application processes via time delayed e-mails and limited phone calls, was difficult at best. Using up phone minutes before the end of a month knowing you won’t get to hear the voices of loved ones until they re-up next month was a gut-wrenching experience. It is not worth it, not even close. I never thought I would get caught, ever, and had fourteen and a half months to think about “being above the law” while major life events for my family passed with me as a spectator from afar. Think about it, please.